John Longworth discusses how government can show commitment to access to finance 

The UK’s post-recession recovery has been impressive, and despite the slowdown in Q3 2015 GDP per capita remains just above its pre-crisis peak. This is credit to the hard work and resilience of British businesses who drove the recovery, and who have also ensured that over the past two years UK GDP grew faster than any other G7 economy.

One of the lasting effects of the recession, however, has been a further reduction in access to capital from UK lenders, particularly non-equity finance. Major UK banks came close to collapse and required significant taxpayer support. Inevitably, many became even more hesitant than normal to lend – particularly to relatively new and fast-growing businesses and those who had run down working capital during the recession. Of course, this is a category that UK commercial banks have historically always found too risky.

It is now more important than ever for the long term health of our economy that access to finance is improved, to enable businesses to move from survival mode to full-on growth mode. We need to take rapid action to capitalise fully on our early recovery if we are to stay ahead of other nations – and that means that business needs access to working and patient investment capital to help expand and invest in future growth.

Unfortunately, after several major initiatives designed to encourage banks to start lending to UK businesses, such as the Enterprise Finance Guarantee, Credit Easing and Funding for Lending schemes, things are far from back-to-normal.

Many banks have highlighted a drop in demand for capital from businesses. At first this seems surprising. However, the difficult trading conditions and uncertain outlook during the recession will have made many firms more cautious about taking on additional financial risks. Those companies that have grown throughout and after the recession are less likely to have gone through the process of applying for finance for their growth plans, and may be unaware of their own readiness for such lending.

A major casualty of the recession was the relationship between businesses and banks. The fear that approaching their financial institutions for support would result in an unwanted review of their banking facilities has led many businesses to become ‘non-seekers’ of finance. This trust will take many years to build back up again.

This is often compounded by the now entrenched and justifiable view that banks will simply not lend to firms or sectors that are viewed as higher risk. In fact, it is probably unreasonable, even in normal times, to expect that commercial banks should take on board such risk. This is the job of equity investors and, crucially, banks underwritten by the state as we see in other nations like Germany, Canada and the US.

There is a big role for government to play in improving access to capital. Some encouraging work has already begun, such as the establishment of the British Business Bank (BBB) by the Coalition Government. What the BBB now needs and deserves is both political support and the resources needed to play a much bigger role, more akin to its international counterparts, in addition to being able to forge a more direct relationship with businesses.

In order to continue to drive economic growth, the UK needs to see a revolution in its approach to exporting. Businesses need greater financial support to help them overcome the additional costs associated with entering new export markets.

As with infrastructure investment, making more finance available to support exporters should be viewed by government as an investment in the future growth of the UK economy. The welcome return of UK Export Finance to the Small and Medium Enterprise (SME) market is an encouraging step in the right direction, and means companies trading internationally can access finance options similar to those of their competitors abroad.

More needs to be done to encourage lenders to improve access to export finance, and schemes like the Business Banking Insight (BBI) project can help to encourage greater competition within the banking sector. The BBI is an independent comparison website backed and delivered by the BCC and the Federation of Small Businesses. It allows companies to check how their peers have rated bank services – and make decisions accordingly. We’re doing our bit to boost competition through transparency, with support from the big high street lenders.

We also need to see greater choice in the financial marketplace to improve competition and choice for businesses. Unfortunately, challenger banks have been flattened by the Chancellor’s decision to impose an additional levy on Corporation Tax, while regulators have made market entry unnecessarily complicated for them.

It will take time and effort to make finance work for businesses. It is important that there is dialogue between businesses, government, and lenders to ensure that the changes that are made are the ones that are most needed. 

John Longworth is the Director General of the British Chambers of Commerce. This piece was originally written for our Centre Write magazine on The Future of Work.